The great wax of the crypto sector

Blockchain Chronicle. The fall of recent days extends the list of weakened players in the crypto sector. The ability to wash and sort the dirty laundry.

In a bull market, everyone is an investment genius. In fact, it was common for native crypto players to mock banks and the so-called traditional financial system. During these periods of euphoria, almost all cryptoassets appreciate. It is therefore easy to see yourself growing wings.

But as Icarus has experienced, it is still necessary to know how to use these wings in moderation. A brutal fall followed by the onset of a bear market provides a discriminatory period to separate the wheat from the chaff. As a result, in addition to the recruitment freeze, players such as Coinbase or Blockfi have announced the reduction of their workforce.

Two types of actors are in the spotlight:

Firstly, the lending/lending actors in CeFi (Centralized Finance).

Indeed, Celsius has suspended the ability to raise its capital for its clients. This decision is explained by this player’s failing risk management. The company offers to deposit its cryptocurrencies in exchange for an interest rate, which itself is funded by Celsius investing in those cryptos.

However, the company is not subject to guarantee measures or the obligation to comply with liquidity ratios, due to a lack of transparency in investment choices. Celsius had already suffered a $120 million loss from Badger’s decentralized financing protocol, which has since been partially reimbursed by the protocol. In addition, Celsius had deposited USTs on the Anchor protocol, whose disastrous fate has been known ever since. Tagged addresses like Celsius have already shown huge positions in products like Lido, which is offering to block ether as part of the transition to Ethereum 2.0. With these ethers locked in, positions are illiquid to date, hence the risk of a ‘bank run’ as the contagion spreads.

The sudden drop in prices could weaken other dogmatic actors.

Blockfi, for its part, had paid a $100 million fine to the SEC for its bid that was deemed not to respect financial collateral laws in 32 states in the US. This was the regulator’s first warning shot targeting this type of platform. In addition, deteriorating market conditions are causing investors to reassess the valuation of these projects. According to TheBlock, the valuation of the round under discussion for Blockfi would rise from $5 billion to $1 billion.

Celsius’s competitors try to show their credentials in their risk management, but opacity doesn’t inspire confidence. The stress test is huge for these players given the withdrawals requested by clients to get their capital back. This is the first bear market for these players with billions or even tens of billions in assets under management.

As such, Nexo has issued a letter of intent to repurchase Celsius’s capital and assets. The coming period will be conducive to acquisitions of players weakened by competitors who have maintained investor confidence. Recent funds, such as Andreessen Horowitz’s third vehicle with more than 4 billion, are entering the market to provide the necessary liquidity.

In addition to the CeFi platforms, hedge funds are also not left out of consideration.

Three Arrows Capital has been one of the hedge funds at the forefront of this bullish cycle with equity stakes in Blockfi, Starkware or Fireblocks, as well as tokens from various blockchains and decentralized financial protocols.

In addition to these participations or holdings, the structure was common for aggressive leveraged operations. One of these co-creators Zu Shu had theorized the concept of “Super Cycle” and explained that the industry would grow to significant levels. This dissertation ignores financial cycles in which asset price can be decorrelated with fundamental value.

The structure would have suffered from liquidations amounting to 400 million according to the media TheBlock.

The sudden drop in prices could weaken other dogmatic actors.

Paradoxically, decentralized funding supports many debt positions on AAVE or MAKER DAO and is resilient in complicated market conditions. In DeFi, transparency brings certainty and trust.

The sector will be purged of the liquidation of bad actors. Humility is an essential value, learned after traversing the desert of a bear market where the effervescence disappears in the blink of an eye.

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